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Equipment leases should be sensible

lease

Equipment leases should be sensible. PHOTO | POOL

To lease or to buy motor vehicles and equipment? Which is the more cost effective option for public sector institutions?

This debate has been raging in the wake of the recent controversy surrounding leasing contracts entered into by the administration of the former Laikipia County governor- Nderitu Mureithi.

I have read allegations that a vehicle costing Sh5 million ended up attracting total lease payments of a whopping Sh 30 million.

I can’t comment on the veracity of this claim because I have not seen the contracts.

What I know is that the narrative that leasing is more expensive is a total myth not grounded in facts.

First, you have to factor in what is called total cost of ownership of a vehicle or capital equipment. You have to factor in the costs of insurance, the cost of scheduled maintenance at the manufacturers recommended service intervals, the cost of unscheduled repairs when parts need to be replaced for optimal operations.

Above all, there is the cost of financing the asset- typically at the government T-bill rate. The upshot of all this is that a typical lease of a vehicle or a capital equipment will come to about twice the acquisition price.

When you compare the acquisition cost of the vehicle or capital equipment and total lease payments, you are comparing apples and bananas.

What were the objectives and intentions of the government when they introduced the motor vehicles leasing programme? The most effective use of taxpayer’s money is in spending it on improving provision of public services- not in owning metal.

I support the police vehicles leasing programme because the money is spent improving the speed at which the police can respond to a security call.

When you lease motorcycles for agricultural extension workers, you are increasing agricultural productivity. The increased payoffs from better public services provided through the leased assets is what is important.

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In the past, you called the police to respond to a security call and the standard response was that they did not have a vehicle. They would tell you that the few vehicles available had stalled for lack of simple spare parts costing Sh1,000.

The true comparison of leasing or outright purchases is between the lack of service the citizen was suffering before the advent of leasing and the improved services they are receiving from leased assets.

What were the economic policy objectives for introducing leasing? You leave ownership and management of the assets in the hands of the private sector, while the public sector concentrates on provision of services.

The police are best deployed at security- not management of fleets of vehicles. It is a specialisation thing. Efficiency is maximised when parties specialise where they have domain expertise.

Agricultural extension officers know nothing about running and maintaining motorcycles. Secondly, we were also targeting development of asset-financing as a financial sector product.

Leasing was introduced to stimulate the local motor vehicle assembly industry in Kenya. We were looking at job creation.

I went back to my archives and dug out a circular that was put out by the former head of Public Service, Joseph Kinyua on June 20, 2020. He made clear that leasing of vehicles and equipment had now become official government policy.

For the first time, the government was admitting that it has no business committing taxpayer money into purchasing depreciating assets. The beauty of operating leases is that it allows you to reduce acquisition costs.

This type of transaction allows you to spread the cost of acquiring the equipment over the useful economic life of the equipment.

What benefit does the government accrue from owning expensive equipment when we know that its core business is service delivery and not owning costly gadgets which not only depreciate, but are also difficult to maintain?

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In my view, the only reason we have been obsessed with outright acquisition of expensive equipment all these years are the opportunities transactions of this type open for rent-seeking.

Managed well, leasing transactions that are negotiated transparently limit opportunities for kickbacks. Our government performs pathetically when it comes to maintaining equipment.

We purchase billions worth of equipment without providing enough money for maintaining them.

Under the National Police vehicle leasing program, maintenance is the responsibility of the manufacturer. And, you are protected from obsolescence of the asset.

In the past, we have had several cases where equipment suppliers literally dumped inappropriate equipment on us. The other benefit of leasing is that when technology changes, the manufacturer immediately upgrades you.

Leasing makes sense. Period.